by Fran Smith
May 26, 2005

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Executive Summary

Since its signing almost a year ago, the U.S.-Central American and Dominican Republic Free Trade Agreement (CAFTA-DR) has been under heavy attack by labor unions, the sugar and textile lobbies, and some environmental groups, which have been hitting the treaty for not going far enough to protect American jobs as well as workers and the environment in the Central American countries of Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica, and the later-added Dominican Republic.

Some politicians, facing furor over the agreement, are asking: Is the game worth the candle? If policy makers look past the heated rhetoric and focus on the reality, they will conclude that the trade agreement has more positives than negatives for American producers, workers, and consumers and for the people in the CAFTA-DR countries.

American producers would gain significantly greater market access for their exports, including farm exports, to CAFTA-DR countries, because of widespread elimina­tion and lowering of tariffs. Further, since those countries already export the majority of their goods to the U.S. duty-free, the trade agreement creates a better balance for the U.S.

The CAFTA-DR countries’ commitments to open many of their markets to U.S. goods and services are not insignificant: Together, they already represent the 10th largest market for U.S. exports worldwide.

Freer trade will benefit consumers, households, and taxpayers in the U.S. and the CAFTA-DR countries by giving them greater access to goods and services, reduc­ing prices, and providing significant welfare gains. More open trade with the U.S. would spur greater economic growth and improve incomes and employment opportunities in the CAFTA-DR countries.

CAFTA-DR would also establish stronger economic ties for the U.S. with not only close trading partners but also close neighbors whose continuing economic and social stability is critical in the Western hemisphere.

On the world stage, ratifying CAFTA-DR would help the United States regain its leadership—and credibility—in pursuing freer agricultural trade through the World Trade Organization, due to hold its next Ministerial Meeting at the end of this year.

However, there are some downsides to the agreement that undermine the goal of more open trade. For example, lengthy phase-outs of U.S. import quotas and tariffs on “sensitive products ” protect too many U.S. special interests. The treaty also goes beyond previous trade agreements in including detailed environmental and labor provisions that could retard economic growth in the CAFTA-DR countries. Such provisions show a lack of recognition that trade and resultant economic growth can be critical in improving both the environment and the lives of workers. Policy makers should be wary of using trade agreements as a big stick to pursue environmental and labor goals. The regulatory costs of imposing rich coun­tries’ standards on developing countries can act as non-tariff trade barriers that threaten the positive benefits of more open trade.

Trade expansion works when pursued through large multi-national agreements in which the rich and the poor countries get equal access to each other’s markets. But much trade is incremental and consists of bilateral and regional agreements that often are flawed, as CAFTA-DR undoubtedly is.

However, to reject CAFTA-DR at this point would be to turn our backs on the benefits of more open trade and cede the political playing field to protectionist interests—whether those protectionists are the sugar and textile industries or pressure groups seeking to promote their agendas, such as labor and the environment, by restricting trade.

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